Nvidia Earnings Deliver a Solid Quarter

Nvidia [NASDAQ:NVDA] announced its FQ3 2013 earnings results and managed to perform very well. In the earnings release and in the call, the company?s executives managed to add color to the strong execution as well as give a broader outlook on the viability of its business on a longer term basis. In this article, we take a closer look at the results and the call to try to construct a complete image of the company today and to try to get a sense of what it?ll look like going into the future.

The ResultsNvidia executed on all cylinders in fiscal Q3. Revenue came in at $1.204B, a 12.9% increase year-over-year and 15.3% quarter-over-quarter. Gross margins also hit a very healthy 52.9%, up 0.7 percentage points year-over-year and 1.1% quarter-over-quarter. Net income came in at $209.1M, up 75.6% from fiscal Q2 and 17.3% year-over-year. Earnings per share landed at $0.33, up 73.7% from the prior quarter and 13.8% year-over-year. The headline results were excellent, but to add more color, it?s time to break it down segment-by-segment.

Consumer GPUsThe headlines these days like to talk about the death of the traditional PC market. While management asserted on the call that high quality tablets would essentially displace the 100M ? 200M unit ?cheap? PC market (which is a positive for Nvidia and its Tegra lineup), it is important to keep in mind that discrete graphics chips don?t go into ?cheap PCs? ? graphics cards are a luxury for gamers who want to play the latest games. Tablets and smartphones won?t be able to replace that.

So, unsurprisingly, strong demand for graphics cards ? driven partially by the growth in the PC gaming market and also by share gains against competitor Advanced Micro Devices ? has allowed Nvidia to post $739.6M in GeForce graphics sales, 14.7% year-over-year increase and a 10.7% sequential increase. The performance per watt, and relatively small die size of its Kepler GPUs allows Nvidia to maintain a widening gross margin and market share lead over its rival.

While the company is optimistic about its position in the market here, the expectation is that the demand environment in FQ4 will be a little more muted but that the firm would be ready to respond to upside in demand if necessary.

Professional SolutionsThe Professional Solutions segment of Nvidia?s business, which includes its Quadro line of workstation graphics cards and its Tesla line of high performance compute accelerators, actually slightly underwhelmed. While the segment saw a 12.4% sequential increase (thanks to the early stages of the delayed Romley platform ramp) in sales here to $220.6M, this was still down 4.2% year-over-year. CEO Jen-Hsun Huang was adamant that this was not due to share loss, but just due to an overall weak workstation market.

The more interesting part of this segment is by far the Tesla lineup of HPC accelerators. While workstations may be stagnant (but ramping Q/Q), the company reported that the sequential growth in the segment was driven primarily by ?a record quarter for Tesla?, citing the 18,000 Tesla K20 order for the Titan supercomputer among many others.

Consumer Products BusinessWhile the discrete GPU market is quite nicely resuming a growth track, the real growth story is on the mobile system-on-chip and baseband side of things. In particular, Nvidia?s produces the Tegra line of ARM-based system-on-chip products for use in smartphones, tablets, and even cars. While Qualcomm has been stealing the spotlight with its Snapdragon S4 products, Nvidia?s tablet business is, according to management, up 100% year-over-year, while its smartphone segment is ?stable.?

The consumer products business ? which the interim CFO notes is comprised mostly of Tegra sales ? grew by 27.6% year-over-year and 35.7% quarter-over-quarter. While this was particularly impressive, management was tepid about sales of these products in FQ4. Why? It?s simple ? all of the tablet makers wanted to have designs ready to sell during the holiday season. This means that any spike up in chip orders would have had to happen during FQ3 rather than in FQ4.

More importantly, the company noted that in the coming quarter, operating expenses would be up to $400M from $384.4M in FQ3. According to the call, this increase is primarily attributable to R&D, and that this R&D is focused on getting a version of the Tegra, codenamed ?Grey?, out with an integrated LTE modem as quickly as possible. Another major R&D focus is on getting Tegra 4 out of the door; we believe that this will be announced during MWC 2013 or sooner, complete with design wins.

Project Denver Update A question came up about the status of Project Denver, the ARMv8, 64-bit, fully-custom, Nvidia-designed high performance CPU core. While management was reluctant to give any details, it did note that the chip was ?doing great?. A little vague, but this product is not expected to be released or accretive to the top or bottom lines anytime soon.

The Balance SheetThe company had $3.43B in cash and cash equivalents on hand at the end of the quarter and their typically negligible debt. This strong financial position, coupled with consistent profitability has led the board of directors to authorize a $0.30/share dividend on an annualized basis, or roughly 2.4% yield at the last closing price of $12.68.

The Takeaway ? A Solid QuarterNvidia did well. Its performance today represents a consistent, focused effort on improving execution since revenues bottomed out in 2009. FQ3 represented a record quarter for the company on the top line, finally hitting revenue numbers that it hasn?t seen since 2007 ? when its stock price hit a high of over $36. While the loss of the low end graphics market and the x86 chipset businesses hurt the company over the last several years, it seems that with its aggressive expansion into the mobile world, it is finally poised to resume the growth track that it was once on.

With plenty of cash, a strong vision, and excellent engineers, it?s going to be an exciting next couple of years to see how the company repositions itself in the fundamentally new world of computing.